Lowest Interest Rates in the Last 5,000 Years

Oct 8, 2015

- By Bill Bonner

Bill Bonner
Santorini, Greece

Dear Diary,

"Gods were gods. Men were men," explained our tour guide, Spiros.

"The ancient Greeks thought there was a difference. Men had to realize that they weren't gods. They couldn't do the things gods could do. And if they tried, it provoked a disaster. The gods got jealous and punished them."

What has changed? There are still things humans can do and things they can't. And when men get too big for their britches, the gods still punish them.

The disaster we were looking at had nothing to do with the hubris of mankind. The problem was geological. Having built their city over the fault between the African plate and the European plate, the ancient Cycladians were in a dangerous spot. Every few thousand years there were bound to be fireworks. As it turned out, trouble came - big time - in about 1700 BC. The earth trembled. And a huge volcano rose from the sea...near Akrotiri...and blew up.

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"The people had plenty of warning," Spiros went on. "There are no human bones in the town. No one was killed by the eruption. They were a sea-faring people. They were fishermen. They probably got in their boats and headed for Crete, which you can see from here on a clear day.

"These people were not Minoans, like the people of Crete. But they traded with one another and knew one another."

Our cruise ship had entered the crater in the early morning. By 8AM 'tenders' were ready to take us to shore. There, we boarded a bus for the short drive to Akrotiri.

"I doubt that they made it to Crete, however," Spiros went on. "Because after the mountain blew up, it collapsed into the lagoon, creating the giant crater we see today. This set off a tidal wave that might have swamped the people of Akrotiri. When it hit Crete, it probably wiped out the Minoan civilization there. Many people think this is the origin of the Atlantis story. I don't know."

There had been people on the island of Santorini for thousands of years before the volcano exploded. They had one of the most advanced civilizations of the time - with indoor plumbing, bronze tools, and professional artists to decorate the inside walls of their houses. They were not an Indo-European people, apparently, and their written language has never been deciphered.

Traveling the Aegean Sea in a luxury cruise ship is not a bad way to discover ancient history. But we are not here just to learn about the Greeks and the Minoans. The proximate cause of this journey was an invitation from a colleague, Merryn Somerset Webb of MoneyWeek magazine in London. We were bid to join the cruise at Catania and stay aboard until we reach Athens next week. On board with us are several MW analysts and editors, in addition to Merryn, including Tim Price, John Stepek and James Ferguson.

We are meant to look at modern disasters, not just ancient ones.

"Central bankers never wanted to get down to the 'zero bound," explained Merryn yesterday. "They are not idiots. They knew it would cause distortions. And they knew they could get stuck there."

Merryn showed a group of investors a remarkable chart. Anywhere else, it would have been ridiculously out of place. But since we are visiting 6,000-year-old ruins, it seemed entirely appropriate.

"This shows interest rates for the last 5,000 years. How they figured out lending rates that long ago, I don't know. But what it tells us is that since the time of Hammurabi and the building of the pyramids - that is to say, forever - interest rates have never been this low. And when you think of any financial decision you make...or when you try to analyze any price...you have to remember that it is in the context of the lowest interest rates in the history of the world."

In general, lower interest rates mean higher asset prices. Every financial asset brings a stream of income. (At least in theory.) And the value of the asset can be thought of as the present value of the income stream, compared to other streams of income. And in a world where you get almost nothing from a "riskless" investment - say, cash invested in US Treasury bills - a stream of income from a corporation or junk bond is almost infinitely valuable.

But woe to the price-fixer who fixes the price of money too low...for too long...and then attempts to raise it. That is the jamb in which Ms. Janet Yellen finds herself. She is damned if she does - for she will wipe out trillions worth of asset prices. And she is damned if she doesn't, for she will only make the situation worse by driving more money into more unsustainable assets.

This is fine by us; she deserves to be damned. She has willingly and wittingly attempted to do what only the gods can do - determine the correct price of lent money. She should have known better.

The proper interest rate - the natural rate...the rate the gods would set if left alone -- could be 2%. It could be 4%. It might be 1%. It might be 4.5%. But it is certainly not zero. An interest rate of zero implies that capital - savings - have no value whatsoever. And when she (and Ben Bernanke) put it there...lower than it has been for 5,000 years, surely, it must have caused the gods to laugh. Now they seek their revenge.

Humans can successfully fix cars. They can figure out ways to beat casinos and emissions tests. But they can't successfully fix interest rates. And they can't beat the gods.

Today, the island of Santorini (named after Saint Irene) is once again populated. Donkeys still carry large tourists up the cliff face. White houses sit on the rim of the crater like icing on a cake. But the town is so crowded with seasonal visitors that it is hard to make your way through the narrow streets. Mobs in shorts follow guides, who hold up signs to keep their people headed in the right direction.

"Brad Pitt and Angelina Jolie have a house here," Spiros announced proudly.

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, just reconfirm your Free subscription to the Daily Reckoning...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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